Investors shouldn’t be overly concerned about the high level of stock prices, for two reasons. First, the market boom has not yet translated into excess spending in the real economy. Household spending is still weak, as shown by retailers rushing to open their stores on Thanksgiving. Many large businesses are reluctant to commit to big capital spending projects, while home building remains low compared to the mid-2000s. So even if the market dropped suddenly — which could happen — the plunge wouldn’t drag down the rest of the economy.
By contrast, during the 2006-2007 finale of the housing/finance boom, consumers, home buyers, home builders and stock investors all fed each others enthusiasm. Rising home prices allowed Americans to borrow and spend, lifting profits and stock prices of consumer product companies. Similarly, the housing boom helped the profits and stock prices of home builders and mortgage lenders. So the post-2007 collapse of the stock market coincided with a collapse of consumption and home building. That’s not going to happen this time.
Second, history suggests that a tech-driven stock market boom can broadly benefit Americans by boosting business investment, creating jobs, and encouraging innovation. Let’s look back at the tech boom and bust of the 1990s, which peaked in 2000. That year, business investment hit almost 15 percent of gross domestic product, compared to today’s 12 percent. And it wasn’t useless investment either — companies were spending on new computers and software, while telecom upstarts such as WorldCom and Global Crossing created huge new fiber-optic networks. Simultaneously, the unemployment rate dropped below 4 percent. True, WorldCom and Global Crossing went bankrupt after the boom ended, as investment in networks outran the immediate demand for bandwidth. But the fiber remained, setting the stage for today’s connected world.
Today’s stock market boom is not yet having a broad impact on business investment. However, the strong market makes it easier for young tech companies such as Twitter to go public and raise capital for expansion. As a result, tech-related jobs are growing, including a 26 percent increase for blacks and Hispanics in computer and mathematical occupations over the past two years. What’s more, the prospect of a successful public offering at a high stock price encourages investors to fund innovative new companies in cutting-edge technologies such as big data analysis, online education, health-related mobile apps and software, cloud storage, financial payment networks, the Internet of Everything and 3D printing.
Will some or most of these companies fail? Of course. But a booming stock market that helps fuel innovation and job growth is a net plus for the U.S. economy.
The New York Times published this article by PPI’s chief economic strategist, Michael Mandel. You can find the original article here.
